Shrinkage losses and year-end adjustments refine inventory records to reflect reality after a physical count:
These occur when the physical count shows fewer units than recorded, due to theft, damage, or errors. For example, if a company records 158 units but counts 152, the cost of the 6 missing units (e.g., using FIFO or LIFO) is removed from inventory and charged to COGS or a loss account.
Inventory is valued at the lower of its historical cost or current market value (replacement cost, within limits). For ski equipment costing $29,000 but with a market value of $28,500, a $500 write-down adjusts inventory downward, increasing COGS or recording a loss.
Ensures purchases and sales are recorded in the correct period. Goods in transit (e.g., F.O.B. shipping point vs. destination) must be correctly assigned to inventory or COGS. Errors here can mimic shrinkage if sales are unrecorded.
These adjustments ensure financial statements reflect true asset values and expenses, impacting profitability and tax obligations.